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Pivot point based trading explained with strategies on those levels
What is pivot point ?
A pivot point (or fulcrum) is a point around which future price movement is expected to range.
Concepts of Pivot point
Based on previous days high, low and closed, pivot point, three resistance R1, R2, R3 and three support
S1, S2, S3 are calculated. It is believed that stock price will range around pivot point most of the time. When stock price reaches first resistance it has a tendency to react to pivot point and in the same way when it moves towards first support it has tendency to react to pivot point. The more movement away pivot point like R3/S3 the more tendency to retrace.
Origin of Pivot Point in stock trading
Use of pivot point is noticed from trader trading in trading zone of the market using pens and papers. These traders used to use these support and resistance to trade in stocks. Even when sophisticated tools have come these points have not lost its significance.
In fact they are used along with tools like candlestick, RSI etc.
Tips on trading with pivot point
- When market opens above pivot point then it is likely to stay above it. Traders may use this option to long and watch R1 as first resistance.
- When market opens below pivot point then it is likely to stay below it. Traders may use this option to short and watch for S1 as immediate support.
- Some traders wait for 15-30 minutes to watch pivot point position to take their call.
- Stop loss for buy call can be S1 and stop loss for sell call can be R1 to control losses.
- Avoid using pivot point when some news that can affect price of the stock is expected.
- When stock opens above R2 or below S2 then some influence is suspected. It may be safe to avoid them till it moves closer to R1 and S1.
- They work well in sideways market
or non trending market.
- In strong trending market avoid using pivot point.
- Pivot point prediction can be done only for next trading day.
Other useful information's helpful while learning Pivot Points
Formula for Pivot Point Calculation
- If price is influenced by external news then pivot point looses its significance.
- Pivot point are not dynamic like moving average. Their value stay same throughout the day.
- In absence of external factors, pivot point is considered as ideal balance between bulls and bears force.
- Pivot point can be calculated for week, month etc.
Pivot point (P
) = (H
) / 3
) = (P
) - L
) = (P
) - H
- Highest Price of Previous Day, L
- Lowest Price of Previous Day,
- Closing Price of Previous Day
Resistance Level 2 (R2
) = (Pivot Point - Support Level 1) + Resistance Level 1
Support Level 2 (S2
)= Pivot Point - (Resistance Level 1 - Support Level 1)
Resistance Level 3 (R3
)= (Pivot Point - Support Level 2) + Resistance Level 2
Support Level 3 (S3
)= Pivot Point - (Resistance Level 2 - Support Level 2)
Pivot Point and TopStockResearch
Pivot Point in TopStockResearch is shown with three support (S1, S2, S3) and three resistance(R1, R2, R3) respectively for each stock.
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